Historically, if a debt owed by a person to a creditor was reduced or discharged for no consideration, or for a consideration that was less than the amount by which the face value of the debt had been so reduced or discharged, then the debtor would be liable for capital gains tax (CGT) on that amount.

However, says Graeme Palmer a Senior Associate in the Commercial Department at Garlicke & Bousfield Inc. , ‘This has now changed as new provisions for the reduction or cancellation of debt were introduced on 1st January 2013 when para 12(5) of the Eighth Schedule to the Income Tax Act, 1962 was scrapped and replaced with para 12A.”By way of example to illustrate the position he says that before 2013 consider the following scenario in a deceased estate: a person disposes of a property to a family trust for R1 million. The R1 million is reflected as a loan owing by the trust to that person. During his lifetime the trust repays R300 000 of the loan, leaving an outstanding amount of R700 000 due to his estate on his death. In his last will and testament he bequeaths the R700 000 outstanding on the loan to the trust. Under the old para 12(5) the bequest of the R700 000 would be considered a discharge of a debt for no consideration and create a taxable capital gain in the hands of the trust.“With the introduction of para 12A CGT would no longer be payable by the trust on the discharge of the debt in the example outlined above.” The new provisions relating to the reduction or cancellation of debt do not apply to an heir or legatee of a deceased estate, to the extent that:• the debt is owed to that deceased estate;• the debt is reduced by the deceased estate; and• the amount by which the debt is reduced by the deceased estate forms part of the of the property of the deceased estate for the purpose of the Estate Duty Act, 1995.

In other words, the R700 000 outstanding on the loan would be a claim in favour of the estate that is reduced by the estate when bequeathed to the trust. It would also form part of the property of the estate which could potentially be subject to estate duty depending on the allowable deductions and the net value of estate.